By James H. Nolt
Since economics was created during the 1870s as an offshoot of political economy, it has rested on a handful of bedrock propositions that unassailably define it. These key propositions are derived from widely adopted core assumptions of all the standard economic models. As I mentioned last week, these assumptions are rarely subject to empirical tests, but are simply assumed as necessary starting points.
In chapter three of my book, International Political Economy: The Business of War and Peace, I refer to three core propositions as the Three Golden Pillars of economics. These three are the conclusions that capitalist economies are stable, efficient, and fair. Models that do not embed these conclusions in their assumptions are mostly ignored in textbooks and sidelined within the profession.
Economists claim that they have proved these three, but they have done no such thing. They have simply discovered a set of assumptions, no matter how ridiculous or bizarre these assumptions are, under which these three pillars would hold. They cement these assumed results by barring admittance to their guild, as much as possible, to anyone not willing to presume these ideological conclusions. Economics today functions as more of a cult than a science.
If economists’ assumptions do not pertain in the real world, then what they claim to know is in fact far in excess of what they actually do know. Last week, I introduced the faulty methodological attitude that sustains economists in their conviction that their enterprise is scientific. The key proposition at fault, which is not accepted by any real science, is that assumptions do not matter. They need not be realistic, it is claimed. In fact, in a widely-cited article, Milton Friedman argued that more unrealistic assumptions are generally more useful.
Starting this week, I will review some of the key assumptions necessary to achieve the results economists widely claim. Anyone not fully indoctrinated into their cult mentality would be amazed at the nonsense economists accept as reasonable or necessary to assume. For those interested in more detail, there are many places to look, but at least read Steve Keen’s Debunking Economics, now in its second edition.
When debunking economics there are many places to start, but I prefer to start at the heart of what I do, that which defines me as a political economist rather than an economist. Economics, as much as possible, ignores private power. Political economy does not.
Economics was created during the 1860s and 1870s by William Jevons, Carl Menger, and Léon Walras. The latter entitled his key work Elements of Pure Economics, because he intended to purify political economy of its complicating concern with power. These founders of what came to be called neoclassical economics imagined a pure realm of “the market” wherein considerations of private power did not intrude.
This was a useful idealization for two reasons: On the one hand, it represented a further extension of the long-standing critique of feudal guilds and mercantilism, a vibrant theme within classical political economy. These egregious exercises in private power were repudiated by many mid-century liberals. The rise of the modern mega-corporation and its even more enormous conglomerates and cartels was then still largely in the future, and so not yet a major concern of free market theorists.
On the other hand, power is difficult to quantify, so part of the justification for ignoring it was methodological. Pioneers like Walras hoped to create mathematical and thereby scientific economics on a foundation of quantifiable relationships. Price and quantity sold, the two axes of supply-and-demand diagrams, are both numerical.
Yet neoclassicals failed to invent a quantifiable theory of value because they assumed that value was a subjective quantity called “utility,” some absolute unit of pleasure or satisfaction, which nobody ever figured out how to measure, let alone sum across individuals. Even if utility could not be measured, it could have assumed mathematical characteristics that enabled equations involving measurable quantities like price and quantity to have determinate solutions. We will come back to these problems in future blogs. Suffice to say that some of the most bizarre assumptions in the entire economic corpus involve the mental gymnastics necessary to imagine consistent utility functions.
Classical political economy from Adam Smith through Karl Marx and John Stuart Mill made the correct and ironically more quantifiable assumption that the value of reproducible products is a function of the cost of production, the objective cost price, rather than the subjective whims of the consumer. Thus, Mill started his widely used textbook, Principles of Political Economy, with production. In contrast, all neoclassical textbooks since Samuelson have focused on consumption first in order to establish the ideological priority of consumer sovereignty always driving production, rather than the more realistic notion that producers also shape consumer tastes by what they choose to produce and market. Incidentally, this latter point is a major theme of the new film, Steve Jobs.
When neoclassical economics was born during the middle of the nineteenth century, at the height of “Manchester liberalism,” it was perhaps excusable to imagine a market realm of hundreds or thousands of atomistic producers competing to establish the market price of commodities like cotton cloth or wheat. By the end of the 19th century, with the increasing domination of production by cartels and giant corporations, this was no longer plausible.
However, rather than modify their theory to take into account real conditions, neoclassical economics continued to cling to the assumption that markets free of private power were a viable starting point for economic studies. The entire supply-and-demand analysis, their theory of the distribution of income along with the most-used theories of the individual capitalist firm, all depend on the assumption that all producers and consumers are very small in relation to the overall size of the market, and therefore no individual economic unit has any influence over the market price. They were stuck with this assumption because the entire edifice of neoclassical economics was built on it. Without assuming that private power does not exist, economists have no way to prove that economies are stable, efficient, and fair. Instead of acknowledging reality, they cling to their ideological preconceptions and refuse to acknowledge pervasive private power.
Some political economists, such as Thorsten Veblen, some post-Keynesians, various Marxists, and the German Historical School, rejected the neoclassical’s obsession with an imagined free market nirvana, but during the massive expansion of academic economics after World War II, the neoclassicals established their dominance in the U.S. (less so overseas) and increasingly excluded dissidents from mainstream journals and departments.
Neoclassicals reading this will no doubt object that they do have theories to take into account private power, such as the chapter or two in every textbook on oligopolies and monopolies. What they do not tell, since there is so little history in textbooks, is that these ideas are late and marginalized additions to neoclassical textbooks rather than being introduced at the very beginning of texts as the characteristic forms of modern economic life. Private power is not a minor footnote or subsidiary chapter of the story of modern capitalism, but the dominant heart of it. Taking private power seriously renders nearly the entire economic textbook superfluous. More on this in the coming weeks.
James H. Nolt is a senior fellow at the World Policy Institute and an adjunct associate professor at New York University.
[Photo courtesy of Wikimedia Commons]